Friday, May 9, 2014

EUR/USD Euro Collapses After Draghi Promises Action at 6/5/14 Meeting

When Draghi speaks, people listen. The ECB head said action will be taken at the next meeting, 6/5/14, only four weeks away, as long the May data and June member forecasts permit the move. Draghi will not say whether a rate cut would be performed or some other type of QE-type stimulus. Traders have priced in a 40% chance that the ECB will cut the benchmark rate, now at 0.25%, by 0.10% at the next meeting. Draghi has to cut the bologna thin since he only has 25 basis points to work with. He may as well adopt a ZIRP Forever policy like the Fed (zero interest rate).

When the ECB rate decision occurs at 7:45 EST, 12:45 GMT, yesterday, and the rate remains unchanged, the euro strengthened since Draghi is perceived as unwilling to act. Once Draghi began speaking at the press conference, however, at 8:30 AM, 1:30 GMT, and promised stimulus for the next meeting, the euro immediately collapses. Overnight it falls through the 1.38 level. The euro, dollar and yen dance will be important moving forward. A lower euro, which Europe desperately needs to jump-start manufacturing and export industries, will send the dollar higher. A higher dollar will place pressure on commodities. The relationship of the euro, dollar, commodities and equities must be monitored here on out. This morning, the euro drops, the dollar pops, and S&P futures are negative. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

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